RO: The timing for the next NBR rate cut hinges on fiscal consolidation measures

The NBR presented its new inflation outlook with significant upward revision in the near-term profile. End-2024 inflation forecast was revised up to 4.9% y/y from 4.0% y/y, while end-2025 is seen marginally up at 3.5% y/y vs 3.4% y/y previously. The end-2024 inflation projection was revised higher a bit more than our expectations of up to 4.7% y/y. The revision was mainly due to higher fresh food prices due to severe drought and regulated electricity prices. The forecast uncertainty is higher.

The NBR Governor reiterated that the monetary policy is counter-cyclical, current policy stance remains restrictive and, as inflation continued to decelerate, it became tighter. As the inflation is expected to fall further, if this happens in a sustainable manner, interest rates should follow the downtrend. The timing of the next rate cut is a function of a coherent and credible fiscal consolidation program and its structure.

Additional messages from the NBR governor Isrescu at the press conference: i) exchange rate stability played an important role in damping import prices pressures; ii) the central bank remains concerned due to growth in wages significantly decoupled from productivity gains which are reflected in external imbalances and inflationary pressures; iii) there are some signs of easing labour market tightness; iv) the real effective exchange rate measures, due to be presented in January, suggest a minor overvaluation of the Romanian currency, of below 5%, which does not explain the large external deficit; v) the central bank is concerned by the twin deficits story, with both shortfalls at around 8% of GDP, which is reflected in higher risk premia for Romania; vi) the positive output gap was revised down and it is expected to close faster than previously estimated; vii) the central bank is alerted by the fast increase in purchasing power and strong rise in consumer loans fuelling household consumption; viii) core inflation is expected to be the main driver for the expected disinflation path.